BANKRUPTCY ABCs FROM AN IMPUDENT LAWYER. I am a Worcester and Central Massachusetts bankruptcy lawyer. I do bankruptcy from all sides: commercial bankruptcies, consumer bankruptcies, and bankruptcy litigation. For most people (and lawyers), the ins and outs of bankruptcy law are scary and hard to understand. I know the law, I don’t scare easily, and I can explain it to you. This blog is your bankruptcy primer – delivered impudently and accurately. Licensed in MA & MA federal courts.

Former
Playmate of the Year Anna Nicole Smith (real name: Vickie Lynn Marshall) (“Smith”)
marries J. Howard Marshall II (“Howard”), who is very old and very rich.

One
year later – Howard dies & leaves Smith out of his will. Before his
death, Smith files suit in Texas
and accuses Howard’s son – E. Pierce Marshall (“Pierce”) – of shenanigans
to keep her out of the will.

Smith
files bankruptcy after Howard’s death, with her claims against Howard’s
estate –separate litigation (up and down the federal court system and
the Texas
court system) ensues.

In
the Smith bankruptcy, Pierce files a non-dischargeability complaint and
a proof of claim based upon his allegations that Smith defamed him
through having her lawyers publicize (through the press) that Pierce
defrauded Smith to gain control of Howard’s assets and estate (the
“Pierce Proof of Claim”).

Smith
objects to the Pierce Proof of Claim and asserts a counterclaim against Pierce
on the theory of his tortious interference with the gift she expected to
get from Howard.

Determinations
in the California
bankruptcy court on both claims – Pierce expresses no issue or problem
with the bankruptcy court hearing issues on the Pierce Proof of Claim,
but objects to the hearing on the Smith counterclaim. Smith gets summary
judgment (in 1999) on the Smith
Proof of Claim, and judgment (after a 2000 bench trial) in her favor on
her counterclaim -- $400 million in compensatory damages & $25
million in punitive damages.

Post-trial
– Pierce argues that Smith’s counterclaim was not a “core proceeding”
& that the bankruptcy court had no authority to issue final findings
of fact and rulings of law (“Final Rulings”) on the counterclaim. Smith
argues that the counterclaim was “core” under 28 U.S.C. §157(b)(2)(C)[1]
(as the bankruptcy court had determined in issuing its final judgment).

The
California US District Court agreed with Pierce that the counterclaim
was not “core”, notwithstanding §157(b)(2)(C), because (in essence) it
was not a “mandatory” counterclaim to the Pierce Proof of Claim (i.e.,
arose from different facts and occurrences), & treated the
bankruptcy court findings and judgment as “proposed”[2].
The District Court then confirmed the bankruptcy court rulings and
issued its own judgment in favor of Smith, in the amount of
$44,292,767.33 (combining compensatory & punitive damages).

A
procedural mess followed, with the case going up to the 9th
Circuit, then up to the SCOTUS (on the issue of a bankruptcy court’s
power to decide probate matters), then back to the 9th
Circuit. In the end, the 9th Circuit concluded that the
District Court should have given the Texas jury verdict preclusive effect,
and ruled in favor of Pierce. Another writ of certiorari followed and
the SCOTUS granted it.

By
the time the SCOTUS decided the case in 2011, both Smith and Pierce were
dead, and their respective estates were carrying on the fight.

Under
the terms of §157(b)(2)(C), the bankruptcy court had statutory authority
to enter Final Rulings on the Smith counterclaim to the Pierce Proof of
Claim.

The
bankruptcy court could also enter Final Rulings on the Pierce Proof of
Claim because: (i) although Pierce claimed that the Pierce Proof of
Claim involved a “personal injury tort” which the bankruptcy court
lacked jurisdiction to hear under 28 U.S.C. §157(b)(5), that statute is not
jurisdictional; and (ii) Pierce’s expressions of consent to the
bankruptcy court determination of the Pierce Proof of Claim waived his objection
to such determination based on §157(b)(5). Justice Roberts noted that Pierce
did consent to the determination of the Pierce Proof of Claim by filing
the proof of claim and then affirmatively stating on other occasions
that he had no problem with the bankruptcy court's determination of the
Pierce Proof of Claim. 131 S.Ct. at 2607-08.

On
the latter point, Justice Roberts wrote: “If Pierce believed that the
Bankruptcy Court lacked the authority to decide his claim for
defamation, then he should have said so -- and said so promptly. See United States v. Olano,
507 U.S.
725, 731 (1993)(‘”no procedural principle is more familiar to this Court
than that a constitutional right,” or a right of any other sort, “may be
forfeited ... by the failure to make timely assertion of the right
before a tribunal having jurisdiction to determine it.”’)[.]” 131 S.Ct.
at 2608.

Does
the Bankruptcy Court have Authority to Determine Smith’s State Law
Counterclaim?

Despite
its conclusion that the Smith counterclaim was a “core” proceeding as
defined by the statute, the majority opinion went on to examine the
bankruptcy court’s authority to issue Final Rulings under Article III of
the U.S. Constitution.

The
majority then goes on to examine whether the core/non-core distinction
in 28 U.S.C. §157, with the bankruptcy courts operating as “adjuncts” of
the district courts, fits within the “public rights” exception to
Article III jurisdiction permitting legislatively-created adjudicators
to necessarily determine state law claims.

In
teasing out the “public rights” exception, Justice Roberts notes that
the following situations qualify for the exception: (1) actions in which
the U.S. Government is a party to the litigation; and (2) actions in
which the rights involved are
“integrally related to particular federal government action” or a
federal regulatory scheme. 131 S.Ct. at 2611-13.

Justice Roberts and the majority
cite the circumstances in Commodity Futures Trading Commission v.
Schor, 478 U.S. 833, 106 S.Ct. 3245
(1986) as a situation in which a state law claim could be determined
under the “public rights” exception to Article III jurisdiction:
specifically, when a mandatory state law counterclaim, arising from the
same facts and occurrences, is asserted in response to a claim that
falls within the determination authority of an agency acting within a
“specific and limited regulatory scheme.” 131 S.Ct. at 2613-14.

The majority contrasts the Schor circumstances with a
trustee’s pursuit of fraudulent transfer claims in Granfinanceria S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782
(1989), in which the SCOTUS held such claims, asserted against a
noncreditor, were “private rights” as opposed to “public rights,” even
if a statute granted the right to pursue the fraudulent transfer action.
131 S.Ct. at 2614.

After this review, Justice Roberts
concludes that the Smith counterclaim is more like the fraudulent
transfer claim than it is the counterclaim in Schor, and concludes that the Smith counterclaim neither
falls within the public rights exception nor “flows from a federal
statutory scheme …[in which the counterclaim’s adjudication] is completely
dependent upon ‘adjudication of a claim created by federal law’”.Id.

Accordingly,
the majority concludes that the California bankruptcy court lacked
constitutional authority, under Article III, to make Final Rulings on
Smith’s counterclaim to the Pierce Proof of Claim, notwithstanding its
“core” nature under 28 U.S.C. §157. In making this conclusion, the
majority dismisses: (1) any “implied” consent to the determination of
the Smith Counterclaim through the filing of the Pierce Proof of Claim –
because of the lack of factual connection between the Pierce Proof of
Claim and the Smith Counterclaim, and the need for separate findings for
each claim, 131 S.Ct. at 2615-18;
(2) the bankruptcy court’s “adjunct” status to the district court, since
such status is not accompanied by an appropriate limitation as to the
areas that a bankruptcy court can decide, 131 S.Ct. at 2618-19; and (3) the concern that
a two-tier adjudication of state law claims, with the need to confirm and approve
proposed findings and rulings through de novo review, does not justify overriding Article III
constitutional concerns even if the process is inefficient, expensive or
impractical, 131 S.Ct. at 2620.

On
the latter point, the majority does appear to backtrack a little on the
scope of its decision: “[W]e
are not convinced that the practical consequences of such limitations on
the authority of bankruptcy courts to enter final judgments are as
significant as [Smith] and the dissent suggest…As described above, the
current bankruptcy system also requires the district court to reviewde novoand enter final judgment on any
matters that are "related to" the bankruptcy proceedings, §
157(c)(1), and permits the district court to withdraw from the
bankruptcy court any referred case, proceeding, or part thereof, §
157(d). Pierce has not argued that the bankruptcy courts ‘are barred from
`hearing' all counterclaims’ or proposing findings of fact and
conclusions of law on those matters, but rather that it must be the
district court that ‘finally decide[s]’ them.... We do not think the
removal of counterclaims such as Vickie's from core bankruptcy
jurisdiction meaningfully changes the division of labor in the current
statute; we agree with the United States that the
question presented here is a "narrow" one.” 131 S.Ct. at 2620.

Is
the Stern v. Marshall Effect on
Bankruptcy Litigation Broad or Narrow?

Answers
from Circuit Courts:

Yes, It is Narrow:

11th
Circuit: Stern v. Marshall involved a “permissive”
state law counterclaim to a proof of claim, and has no application when
the counterclaim is “mandatory”, i.e. arising from the same facts and
occurrences, as in loan payment recoupment claims asserted in response
to a secured creditor’s action to determine the validity, extent and
priority of its lien. Sundale,
Ltd. v. Florida
Associates Capital Enterprises, LLC (In re Sundale, Ltd), __ F 3d
__ (Case No. 12-11450 11th Cir. 11/29/12).

1st
Circuit: Stern v. Marshall is
limited in scope and inapplicable to a Truth in Lending rescission
action, when the bankruptcy court’s resolution of that action was
necessary to its determination of the secured creditor’s motion for
relief from stay. DiVittorio v.
HSBC Bank USA
(In re DiVittorio), 670 F.3d 273, 282 n.4 (1st Cir. 2012)

“It
Depends”:

9th
Circuit: Although Stern v.
Marshall certainly applied to a bankruptcy court’s determination of
a fraudulent transfer case under 11 U.S.C. §548 against a noncreditor,
the right to a hearing in an Article III court can be waived by a
party, and the bankruptcy court could still issue final findings of
fact and rulings of law on the claim when the defendant had failed to
object or indicate a lack of consent to such hearing, until the final
judgment was challenged on appeal. Executive
Benefits Insurance Agency v. Arkison (In re Bellingham Insurance
Agency, Inc.), ___ F.3d ___ (Case No. 11-35162 9th Cir.
12/4/12).

No,
It is Broad and Far-Reaching:

6th
Circuit: In determining a debtor’s state law fraud counterclaim
against a secured creditor in the context of the debtor’s declaratory
judgment action to disallow and discharge the creditor’s secured and
unsecured claims, the Sixth Circuit stated: “ Stern thus provides a summary of
the law in this area: When a debtor pleads an action under federal
bankruptcy law and seeks disallowance of a creditor's proof of claim
against the estate—as in Katchen—the bankruptcy court's authority is at its
constitutional maximum.(my emphasis – KCM) 131 S. Ct. at 2617-18.
But when a debtor pleads an action arising only under state-law, as
in Northern Pipeline; or when the debtor pleads an
action that would augment the bankrupt estate, but not ‘necessarily be
resolved in the claims allowance process[,]’ 131 S.
Ct. at 2618; then the bankruptcy court is constitutionally
prohibited from entering final judgment. Id. at
2614.”Waldman
v.Stone, ___ F.3d ___, ___ , 2012 WL 5275241 (6th Cir. Oct.
26, 2012).

What
Are the Courts Doing to Accommodate Stern
v. Marshall
in Practice?

National
Rulemaking: In September 2012, the Advisory Committee on Bankruptcy Rules for the Judicial
Conference of the United
States proposed amendments to Bankruptcy Rules
7008, 7012, 7016, 9027, and 9033 to address the “inefficiencies” of Stern v. Marshall. The common
theme in each rule is to require each party to state whether or not the
party consents to the bankruptcy court’s final determination of facts and
final rulings, with opportunities at the pleading stage (proposed Fed. R.
Bankr. P. 7008 & 7012), if the case is removed from another court
(proposed Fed. R. Bankr. P. 9027), and at pre-trial conferences (proposed
Fed. R. Bankr. P. 7016). The proposed rules also eliminate any
requirement that the parties state whether each count is “core” or
“non-core”[3]. Proposed
Fed. R. Bankr. P. 9033 follows this trend in eliminating any reference to
28 U.S.C. §157(c)(1) with respect to proposed findings and rulings issued
by a bankruptcy court, thus acknowledging that proposed findings and
rulings may be required in “core” matters as well as “non-core” matters.

Local
Rulemaking: At least one bankruptcy court, has adopted the “get
consent to everything first” approach taken up by the Advisory Committee
to the Judicial Conference. Bankr. SDNY Local Bankruptcy Rule 7008.1
(adopted 4/16/12); seealsoLocal Rule 7012-1 (Bankr. D. Md.) (requiring statement of consent in
pleadings); Local Rule 7008 (Bankr. W.D. Mich.)(same). U.S. District Courts
have mostly reacted by reaffirming the referral of bankruptcy matters to
bankruptcy courts, and requiring that all determinations under Stern v. Marshall be made, in the
first instance, by the bankruptcy court (as opposed to through a motion
to withdraw reference addressed to the district court). Amended Standing
Order or Reference (D. Del. 2/29/12);
Standing Order of Ref. 6:12-MC-26-ORL-22 (M.D. Fla. 2/22/12); L.R. 206
(D. Mass. effective 6/5/12); Amended Standing Order of Reference
(S.D.N.Y. 1/31/12); General Order No. 2011-12 (S.D. Tex. 11/29/11)[4].

[1] §157(b)(2)(C) provides that “Core proceedings
include, but are not limited to, …counterclaims by the estate against persons
filing claims against the estate[.]” Pursuant to §157(b)(1), bankruptcy courts
“may hear and [finally] determine” all core proceedings arising under title 11,
and enter orders and judgments subject to appellate review as a final order,
judgment or decree under 28 U.S.C. §158. Cf.
28 U.S.C. §157(c)(1) “A bankruptcy court may hear a proceeding that is not a
core proceeding but that is otherwise related to a case under title 11. In such
proceeding, the bankruptcy court shall submit proposed findings of fact and
conclusions of law to the district court, and any final order or judgment shall
be entered by the district court after considering the bankruptcy judge’s
proposed findings and conclusions and after reviewing de novo those matters to
which any party has timely and specifically objected.”

[2]
Interestingly, the Texas
state court had conducted a separate jury trial on the parties’ dispute and
rendered a verdict in Pierce’s favor; however, the District Court declined to give
that verdict preclusive effect.

[3]Butsee 28 U.S.C.
§157(b)(3) – “The bankruptcy judge shall determine, on the judge’s own motion
or on timely motion of a party, whether a proceeding is a core proceeding … or
is a proceeding that is otherwise related to a case under Title 11. A
determination that a proceeding is not a core proceeding shall not be made
solely on the basis that its resolution may be affected by State law.” One can
assume that the Advisory Committee wants to avoid messy pleadings that state
that a matter is “core” under §157, but is otherwise “non-core” for the
purposes of the bankruptcy judge’s authority to enter final findings and
rulings.

[4] In
citing all these rules, I acknowledge the work done by David Mawhinney, law
clerk to Judge Frank Bailey of the Massachusetts Bankruptcy Court; he collected
these rules in materials presented to the district court judges for Massachusetts and was a
driving force in proposing Local Rule 206 to them.

About Me

I am a 50-something year old attorney who lives and works in Worcester, Massachusetts. I concentrate my practice on bankruptcy (consumer, commercial and small business bankruptcy in Chapter 7, 11 and 13), with bankruptcy litigation expertise as well. I have also provided services to clients in commercial collections and litigation, general business consultation, and in residential real estate matters. In my varied career, I had stretches in which I foreclosed mortgages for mortgagees, wrote state and federal appellate briefs, and helped investigate and report on allegations of breaches of fiduciary duty and self-dealing by corporate officers and directors.

NOTE: I am licensed to practice as an attorney only in the Commonwealth of Massachusetts and in Massachusetts federal courts. NOTHING in my blog is intended to be specific or complete legal advice, and is for general information purposes only. If you think you need specific or complete legal advice from me - call me and set up a consultation. Finally - nothing in my blog represents the view of any person or organization other than myself. I wrote it, it's my view, and my content.

My interests outside of my practice include: being (an older) father to my two young sons; playing volleyball; performing on the community theater stage; and reading and watching sci-fi and fantasy (in my spare time). Big Game of Thrones fan here, way back to 1996. I can discourse on the BoSox, the Pats, or the Celts and seem like I know what I'm talking about. I also enjoy good food, good wine, good beer, and good company.